Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

AMERISURE MUTUAL INSURANCE v. MICROPLASTICS, INC. (September 20, 2010)

Microplastics manufacturers small plastic components. In 2004, it sold components to Valeo for use in manufacturing automobile door latch assemblies. Before the end of that year, it was apparent that the components were defective. Attempts to resolve the problem were unsuccessful. Valeo terminated the contract and applied money still owing to offset its damages. Microplastics filed suit for breach of contract -- Valeo asserted a counterclaim alleging that Microplastics failed to meet its engineering and quality specifications. Microplastics notified Amerisure, its insurer under a series of CGL policies. The policies provided coverage for "property damage," defined as physical injury to or loss of use of tangible property. Amerisure denied coverage and filed an action for a declaration that it had no duty to defend or indemnify. Microplastics and Valeo settled the underlying dispute. Judge Nordberg (N.D. Ill.) granted summary judgment for Amerisure. Microplastics appeals.

In their opinion, Judges Cudahy, Ripple, and Hamilton affirmed. Under Illinois law, a court compares the allegations of the complaint to the policy language. If those allegations potentially fall within the policy language, the insurer has a duty to defend. Here, the policy covers "property damage" -- but property damage coverage applies to liability for damage to the property of others, not to the cost of repairing the insured's own property. The Court noted that it was unclear from Valeo's counterclaim whether it was asserting such loss. The Court conceded that it was theoretically possible that some of Valeo's losses resulted from damage to property other than the defective product. Theoretical losses, however, are not enough. The duty to defend is triggered only by actual allegations in the complaint, not implied ones. There is nothing in the complaint or the record suggesting any "property damage."

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HAYES LEMMERZ INTERNATIONAL v. ACE AMERICAN INSURANCE CO. (August 31, 2010)

An explosion at a plant owned by Hayes Lemmerz International-Huntington (LMIH) , a subsidiary of Hayes Lemmerz International (HLI), injured one employee and killed another. The injured employee and the widow of the deceased employee filed workers' compensation claims against both HLI and HLIH as employers and recovered. They then brought a tort suit against the same two companies. The suit did not identify either defendant as an employer. Rather, it alleged that the defendants owned and operated the plant and failed to exercise reasonable care. Apparently, they did not identify the defendants as employers because the exclusive remedy against an employer for a workplace injury is a workers’ compensation claim. HLI notified ACE American Insurance Co., its employer liability policy carrier. ACE declined to take over the defense and offered to pay only half the combined litigation expenses. HLI incurred over $250,000 in defense costs attempting to convince the state court that it was not the employer -- and therefore not liable. Ironically, it eventually discovered that Indiana, by statute, treats a parent and its subsidiaries as joint employers, for workers' compensation purposes, of each other's employees. The suit against HLI was therefore dismissed with prejudice because of the workers' compensation bar. HLI brought an action against ACE for recovery of its attorneys' fees. Chief Judge Simon (N.D. Ind.) dismissed the complaint. HLI appeals.

In their opinion, Judges Bauer, Posner, and Flaum affirmed. Under Indiana law, the duty to defend is determined by the nature of the complaint. The "nature of the complaint" includes not only the specific allegations contained therein but also facts readily ascertainable by the insurer. Here, although neither HLI nor HLIH were identified as employers in the complaint, the Indiana statute made their status as such readily ascertainable. The fact that the complaint lacked merit is irrelevant -- an insured deserves a defense to meritless complaints as well as meritorious ones. A duty to defend (or reimburse) therefore existed. However, that duty requires reimbursement only of reasonable costs of defense. HLI's failure to appreciate the existence and significance of the Indiana statute (HLI has filed a malpractice action against its lawyers) led the Court to conclude that the defense costs were unreasonable and unrecoverable. The Court also rejected HLI's argument that ACE's duty to defend included a duty to advise it about the existence of the statute. ACE had no duty to provide legal advice.

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MEDMARK CASUALTY INSURANCE CO. v. AVENT AMERICA (July 15, 2010)

Avent America manufactures a number of products for children and babies. Several class actions have been filed against Avent alleging a) that certain Avent products contain Bisphenol-A (“BPA”), b) that Avent was aware of research indicating that BPA was harmful, c) that Avent claimed their products were safer than its competitors', and d) that plaintiffs suffered economic damages because they stopped using the products once they learned of the risk of harm. The complaints contained no allegations of actual bodily injury to the plaintiffs. In fact, Avent moved to dismiss the complaints because they lacked sufficient allegation of injury. The court did dismiss all but the unjust enrichment counts for any plaintiff who either used or disposed of the product before learning of the BPA -- concluding that those plaintiffs were unaffected by the alleged concealment. Meanwhile, Avent tendered the cases to a number of insurance carriers who had provided general commercial liability insurance over the relevant years. The language in each of the policies was substantially the same and provided coverage for damages "because of bodily injury." The carriers denied coverage and suit was filed. Judge Leinenweber (N.D. Ill) held for the carriers because of the absence of any allegation of bodily injury in the underlying complaint. Avent appeals.

In their opinion, Judges Flaum, Wood, and Hamilton affirmed. The Court began with the familiar Illinois standard for a duty to defend -- the duty to defend arises if the complaint’s allegations are even potentially within the scope of coverage. The Court considered and rejected the carriers' argument that Avent was judicially estopped from arguing that the underlying complaint alleged bodily injury when it argued in its motion to dismiss that the complaint did not allege bodily injury. Cautioning that a court must be careful in applying judicial estoppel in duty to defend cases, the Court found that Avent's argument was not in direct tension with its prior position. On the merits, the Court agreed with the carriers. The theory of relief stated in the complaints was for economic harm -- had the plaintiffs known of the risk of harm of BPA, they would not have purchased the product. There is a total absence of any claim of bodily injury, direct or indirect. The "because of" language in the policies may broaden the umbrella of coverage over a simple "bodily injury" policy, but the damages in such a case must be related somehow to bodily injury. Here, they are not. The Court recognized that the complaints could be amended in the future to include allegations of bodily injury. The Court noted that the carriers admitted during oral argument that they would have to reassess their coverage positions in such a case.

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SANTA'S BEST CRAFT v. ST. PAUL FIRE AND MARINE INSURANCE CO. (July 1, 2010)

JLJ, Inc. manufactures Christmas lights. So does Santa's Best Craft, LLC (“SBC”). In 2002, JLJ claimed that SBC copied its packaging and slogan and sent a cease-and-desist letter. SBC forward JLJ's letter to St. Paul Fire and Marine Insurance Company, its general liability insurer. St. Paul denied coverage. St. Paul again denied coverage after JLJ brought suit. JLJ amended the suit in 2004 to add two members of SBC and a licensee (Monogram). SBC brought suit for a declaration that St. Paul provide a defense. SBC settled the underlying litigation in late 2004 for $3.5 million. SBC reimbursed Monogram for $1.3 million in defense costs under a contractual indemnity. Although the St. Paul policy covered Monogram as an indemnitee, Monogram never tendered its defense. Judge Gettleman (N.D. Ill.) concluded that St. Paul had a duty to defend but had not breached it. It then stayed the action pending the result of state court litigation. SBC had brought suit in state court against Zürich American Insurance Company, which insured SBC prior to St. Paul. Zürich brought St. Paul into that action. The state court entered judgment in favor of the plaintiffs for their defense costs but denied prejudgment interest. The district court then concluded that St. Paul was not required to indemnify SBC for the settlement costs on the ground that some claims were not covered and the settlement amount was not allocated between covered and uncovered claims. SBC appeals.

In their opinion, Judges Cudahy, Flaum, and Evans affirmed in part and reversed and remanded in part. The Court first concluded that the St. Paul policy did create a duty to defend. That duty arises when the allegations of the complaint are potentially within the provisions of the policy. Here, both the complaint and the policy refer to the unauthorized use of a slogan. The Court also concluded that neither the intellectual property or the "material previously made known" exclusions governed. With respect to the former, coverage is not excluded simply because "trade dress" claims, which are a subset of the slogan infringement claim, are excluded. With respect to the latter, the parties' admissions established its inapplicability. Second, the Court agreed with the district court that St. Paul did not breach its duty to defend. Under Illinois law, St. Paul's action for declaratory judgment before trial satisfied its obligation. Third, the Court addressed the settlement payment. It noted that different states have adopted different approaches to settlement costs indemnification when the settlement includes covered and uncovered claims. It ultimately predicted that an Illinois court would apply a "primary focus" test under which an insured would have the burden to show that the primary focus of the settled claims was a potentially covered loss. The Court remanded for that determination. Fourth. the Court determined that St. Paul was not obligated to reimburse SBC for Monogram’s defense costs. A prerequisite to St. Paul's duty to defend an indemnitee is a determination that no conflict of interest exists. Here, the district court concluded, and the Court agreed, that such a conflict existed. Finally, the Court noted that the district court addressed prejudgment interest with respect only to the Monogram defense costs, not to the plaintiffs' defense costs. It remanded for consideration of that as well. 

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NATIONAL CASUALTY CO. v. MCFATRIDGE (April 28, 2010)

Randy Steidl was convicted of murder in Edgar County, Illinois in the late 1980s. The Edgar County State's Attorney at the time, Michael McFatridge, conducted the prosecution. More than fifteen years later, a federal court issued a writ of habeas corpus invalidating the conviction. Steidl brought suit against McFatridge and the County, as well as several police officers. Steidl alleged that McFatridge framed him by threatening witnesses and concealing exculpatory evidence at trial -- and that McFatridge continued his campaign long after he left office. He brought claims under § 1983 for false arrest, false imprisonment, malicious prosecution, conspiracy, and intentional infliction of emotional distress. The County tendered the complaint to its insurers. The insurers sought a declaration that they had no duty to defend. The court granted summary judgment to the insurers. McFatridge and the County appeal.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Rovner affirmed. The Court first stated the well-settled rule in Illinois that an insurer has a duty to defend if the complaint alleges facts potentially within the coverage of the policy. At issue in the case were four policies: a law enforcement liability policy and three CGL policies, one per year from mid-1997 until mid-2000. First addressing the law enforcement policy, the Court agreed with the district court that it did not cover the County's liability. The principal insured under that policy was the County of Edgar Sheriff's Department. Although the County itself was an additional insured, it was so only with respect to liability arising out of the activities of the Sheriff's Department. The allegations of the complaint directed at McFatridge and the County were unrelated to any activities of the Sheriff's Department. The Court also relied on the definition of "occurrence" and the fact that McFatridge was not a County employee in affirming the coverage denial under the law enforcement policy. On the other hand, the CGL policies did insure the County and its elected officials for liability arising from offenses like false arrest and imprisonment. The Court also affirmed coverage denial under these policies, however. McFatridge was not an elected official during any of the three policy years and none of the alleged wrongs occurred during the policy years. The federal and state claims relating to false arrest and false imprisonment offenses accrued at the time of Steidl’s original arrest, long before the first policy year. The federal and state claims relating to the wrongful conviction, on the other hand, did not accrue until after Steidl’s conviction was invalidated, long after the last policy year.

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EBERTS v. GODERSTAD (June 29, 2009)

The Goderstads sold their large, vintage Wisconsin home to the Ebertses for $1.85 million. Within months of their occupancy, they began to notice significant defects. The Ebertses brought a seven count complaint in the district court. American Family Mutual Insurance Company, the Goderstad’s insurer, reserved its rights, appointed counsel, and moved to intervene to protect its interests. The district court concluded that none of the claims were covered under any of the Goderstad’s policies. It granted summary judgment to American Family and certified its judgment under Rule 54 (b). The Goderstads appeal.

In their opinion, Judges Ripple, Williams and Sykes affirmed. The Court noted that American Family has a duty to defend if the allegations of the complaint raise the possibility of coverage. The Goderstads have four policies, each of which insures against “property damage” caused by an “occurrence,” an “occurrence” being defined as an “accident.” On appeal, the Goderstads argue that two of the allegations of the Ebertses’ complaint trigger coverage – fraudulent misrepresentation and negligent misrepresentation. The Court looked to the Stuart case in Wisconsin, which had been decided by the court of appeals shortly after the district court ruled and decided by The Wisconsin Supreme Court shortly after oral argument in the Seventh Circuit. The unanimous decision in Stuart effectively disposed of the Goderstad’s argument with respect to fraudulent misrepresentation. The court reversed the court of appeals and held that a fraudulent misrepresentation claim by definition has a degree of volition inconsistent with “accident.” With respect to negligent misrepresentation, the Court blocked both avenues attempted by the Goderstads. First, the Court held that Wisconsin law predating and unaffected by Stuart held that negligent misrepresentation was not covered by a policy insuring against an “accident.” Next, the Court held that the Goderstad’s attempts to get around that principle by arguing that theirs was a non-disclosure claim failed because Wisconsin does not recognize such a tort. Finally, the Court noted that the Goderstads suffered no “property damage” as defined in the policy and was not entitled to a defense for that reason as well.

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HEALTH CARE INDUSTRY LIABILITY INSURANCE PROGRAM v. MOMENCE MEADOWS NURSING CENTER, INC. (May 20, 2009)

The Health Care Industry Liability Insurance Program (the "Insurer") issued a commercial general liability policy to Momence Meadows Nursing Center, Inc. (“Momence”). The policy included commercial general liability coverage and professional liability coverage. After the policy was issued, two former employees brought an action against Momence for violations of the False Claims Act and the Illinois Whistleblower Reward and Protection Act ("IWRPA"). The suit alleged that Momence submitted false claims to the United States and the State of Illinois and that the employees were retaliated against for bringing the charges. The basis for the false claims charge was that Momence improperly certified that it was meeting the Medicare and Medicaid standards of care. The complaint alleged numerous instances of improper care, inadequate nutrition, and injuries to patients. The insurer brought this action for a declaration that it had no duty to defend or indemnify Momence. The court granted summary judgment to the insurer on the duty to defend and held that the issue of indemnification was not ripe. Momence appeals.

In their opinion, Judges Manion, Rovner and Sykes affirmed. The Court first addressed Momence's argument that the district court’s rulings on the issues of duty to defend and indemnification were inconsistent. The Court actually agreed with Momence but disagreed on the outcome. In Illinois, the duty to defend its broader duty to indemnify. Therefore, a finding of no duty to defend precludes a finding of a duty to indemnify. Instead of allowing the lower court’s decision on indemnity to reopen its decision on a duty to defend, the Court simply concluded that there was no duty indemnify if the district court properly held there was no duty to defend. The Illinois rule on duty to defend is that if any portion of a complaint is potentially within the scope of coverage, an obligation exists. The Court rejected Momence's argument that the allegations of physical injury underlying the false claims and IWRPA counts fell within the "bodily injury" coverage of the policies. The Court concluded that the damages sought by those counts of the complaint resulted from the allegations of false filings, not from allegations of bodily injury. The Court could find no theory of recovery in the complaint that required proof of bodily injuries. The Court also summarily rejected Momence's arguments that the retaliation counts were somehow included within the policies’ coverage.

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NAUTILUS INSURANCE CO. v. 1452-4 N. MILWAUKEE AVENUE, LLC (April 7, 2009)

1452-4 N. Milwaukee Avenue, LLC ("1452") was the owner of the property at that address in Chicago. 1452 had a comprehensive general liability insurance policy issued by Nautilus Insurance Co. ("Nautilus"). The policy contained an exclusion for property damage arising out of operations performed by contractors or subcontractors. When 1452 was sued by the owner and insurer of the property next door for damages allegedly caused by its contractor’s negligent excavation, 1452 tendered the action to Nautilus. Nautilus brought an action seeking a declaratory judgment that it had no duty to defend or indemnify 1452 in the underlying lawsuit, relying on the exclusion. The court rejected Nautilus' argument and entered a declaration that Nautilus had a duty to defend. Nautilus appeals.

In their opinion, Judges Ripple, Sykes and Tinder reversed and remanded. The Court identified the issue as whether the damages alleged in the underlying complaint fall or potentially fall within the policy’s coverage. The Court noted that the lower court did not apply the contractor exclusion because of an allegation in the complaint that 1452 itself was directly liable because it failed to provide statutorily required notice of excavation to the neighbor. The Court disagreed with the lower court’s analysis. The Court emphasized that the notice claim sought recovery for the same loss as the other claims. Relying on Illinois jurisprudence, the Court concluded that, because the property damage alleged in the complaint falls within the policy exclusion, the alternative theory of relief does not trigger coverage.

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